What Goes Into Determining My Auto Premium?
If you've ever wondered why your car insurance bill is so high, you're not alone.
Insurance companies are notoriously tight-lipped about the actual calculations that go into determining your premium. We're here to make sense of it all!
In order to get a better understanding of this process, we need to define some industry terms.
What is "usage"?
Usage refers to how many miles you drive in a calendar year, as well as how many days per month that are considered "high-risk" driving days for each licensed driver on the policy—i.e., any time they drive between 9 p.m and 6 a.m Monday through Saturday or 11 p.m and 6 a.m. on Sundays.
So, for example, a person who drives the same car every day and drives exactly 25,000 miles per year would have a low-risk profile (they drive a lot and don't drive at night or on the weekends). A driver who drives the same car every day and drives exactly 10,000 miles per year would have the highest-risk profile (they drive very little).
A low-risk person might pay $1,000 or less each year to insure their car, while a higher-risk driver might pay $4,500 or more. The actual number depends on other factors such as age and gender, but usage plays an important role in determining your premium.
Is "household" the same thing as "family"?
Household is not the same as family. Household is simply what life looks like when you live with a spouse or partner and all of their friends, co-workers or significant other. Family refers to the people who live in your house or live in your car with you. Usage also plays into household, but it also factors into family coverage as well.
How does "high-risk" compare with "low-risk"?
Insurance companies use two sets of criteria when deciding whether to provide insurance for a person: high-risk and low-risk. The rules for determining which set a person falls under are fairly complex (see below).
High-risk characteristics include:
• Age: The younger you are, the more likely it is that you'll be considered a high-risk driver.
If a person is between 16 and 21, they are 3 times more likely to have problems with their insurance than someone over 25. If they are between 16 and 22, they are 6 times more likely than a 25 or older driver. This is due to inexperience and poor driving habits.
People between 25 and 32 years old are less than half as likely to have insurance problems as people over 32. This is because people in this age group are more mature and experienced drivers who have had more time on the road to hone their skills.
• Gender: Men are considered high-risk drivers far more often than women.
Men are more likely to have speeding tickets, accidents and convictions for reckless driving. This translates to a higher risk of filing for a claim. Men also tend to drive larger, more expensive cars than women, which leads to higher insurance rates.
However, this is not the case in every state. Some states have outlawed gender as a rating factor.
• Credit: Anyone with poor credit will be considered high-risk, including individuals with a bankruptcy, major derogatory marks on their record or accounts that have been sent to collections.
• Where you live: High-risk areas are typically inner cities with high crime and poverty rates, but some states have penalties for living in counties with a high number of insurance claims.
Lower-risk characteristics include:
• Clean driving record: A good driving record can lower your premium regardless of where you live or how old you are. A clean record includes no accidents, speeding tickets or other moving violations.
If you've never had a ticket or accident, ask your agent if that can be factored into your premium calculations. If it can't, shop around and compare prices to see if another company might offer better pricing on the basis of your good driving record.
• Good grades: Like your driving record, good grades can have a positive impact on your premium. If you are a high school student or have recently graduated, ask your agent if any of your grades can be factored into the calculation. If it can, shop around to see if another company might offer better pricing on the basis of your good grades.
If you are a parent with teenagers who have been especially responsible lately (aka not skipping school or causing trouble), also ask about the possibility of getting a discount for them based on their good behavior.
• Marital status: Being married or engaged (or living with a partner) is typically considered lower risk than being single.
This can vary from state to state. Some states consider living with a partner as a risk factor, while others don't. So if you are married and live in a high-risk state, it may be worth it to get married again in some other state that doesn't consider living with your partner as a high-risk factor.
What's the difference between "auto insurance" and "car insurance"?
Car insurance is the part of your policy that covers damage to your car (things like accidents, theft, vandalism or mechanical breakdowns).
Auto insurance is the part of your policy that pays for damage to other people's cars (think: hit and runs or people hitting parked cars).
What's the difference between "compound accidents" and "auto-accidents"?
Compound accidents are things that occur when there is damage to two or more cars at the same time. Some examples include hitting a parked car, colliding with another car that in turn hit another parked car, hitting someone else's mailbox or hitting an airplane.
An auto-accident is a simple accident where you're hit by someone else's car while driving.
Is it possible for one person to have several policies on the same car?
It's sometimes possible to have more than one policy on the same vehicle. If you have more than one policy and haven't signed a waiver stating that you understand it's against the law, you are at risk for having multiple insurance claims. If your claim is denied due to multiple policies, try to find another carrier. Some insurance companies will only have you under one policy and will not accept new customers, so you'll need to shop around before signing.
What is "subrogation"?
If someone has an accident while driving with your car on the day of the accident, your car insurance company might be able to collect from the other driver's insurance company and use that money to compensate you for your injury.
You can read more about subrogation in the section below on auto-accidents.
What is an "accidental death benefit"?
In addition to the policy you have on a car, your insurance may cover lost income for your family in the event of a fatal car accident. This is called the accidental death benefit. The amount is usually equal to a specific percentage of your annual income.
What is "excess coverage"?
Extra coverage can be added to cover any losses that are not paid by flood insurance policies. The most common types of extra coverage are:
Can I have car insurance without having auto-insurance?
Technically, yes. You could just have auto insurance, or no coverage at all.
Conclusion
If you decide to go with this option, make sure your state insurance commissioner gives you permission. You can also see if you qualify for a discount on your auto insurance because of chronic illnesses or criminal convictions.
"Flood" means any kind of water (river, riverbank or reservoir). Usually when people think of natural disasters they picture hurricanes, tornadoes and mudslides. However, floods are also the result of heavy rain resulting in urban runoff. To learn more about flood insurance visit the Flood Insurance section.
You can find out how much coverage you need by going to your state's Department of Insurance and checking out the minimum requirements for homes and cars.